Competition to continue driving Ontario cannabis retail despite crowded market
Competition in Ontario's crowded cannabis retail market is poised to get even hotter as large pot shop owners continue to double-down on Canada's biggest market.
That fight will be found from street corners to shopping malls as pot shop owners scramble to find new locations to open their stores in what has been a frenzied battle for the wallets of Ontario's cannabis consumers.
"It really is going to come down to getting the best location you can get," said Steven Fry, chief executive officer of Sessions Cannabis, a retailer with 37 stores open in Ontario. "It's like a game of Monopoly where finding the right location is a big part of success."
Larger retailers will also look for M&A deals to consolidate weaker operators, several retail executives said. Bigger cannabis operators also benefit from sizable marketing budgets and better relationships with landlords to secure locations, they said.
Ontario continues to lead the country in cannabis sales with $120.1 million in June, and includes the highest amount of legal stores in Canada with 891 at the end of July. As the province gets closer to its target of 1,000 retail stores open by September, Cannabis Benchmarks estimates that the provincial market in June, including illicit sources, is roughly $239 million.
Despite some criticism from consumers and owners alike for clustering retail locations in certain cities, those sales figures remain an attractive proposition for cannabis retailers. The province itself could likely support roughly double the number of cannabis stores - over 1,900 - it has today based on a per capita comparison conducted by Cannabis Benchmarks that compared the province to mature markets like Oregon and Colorado.
"This level of accessibility would almost certainly minimize illicit market activity and shift a significant portion of the overall cannabis sales volume to legal channels – something the regulated industry is very much looking forward to," said Het Shah, managing director of New Leaf Data Services, which owns Cannabis Benchmarks.
Trevor Fencott, chief executive officer at Fire and Flower Holdings Corp., which runs 30 stores in Ontario, agrees that the province still has more room to add more legal pot stores, but admits that some specific markets like Toronto are oversaturated.
"I think the business model for a lot of folks was to open something up and then sell it," he said in an interview. Fencott added that he thinks any failing stores will likely close their doors or be bought out over the next five years.
Canopy Growth Corp.'s Tokyo Smoke retail brand - which currently has more than 40 stores open in the province - struck a deal with mall operator Cadillac Fairview to open a number of pot shops in several Ontario shopping malls. Tokyo Smoke, which operates in Ontario under a master franchise agreement with Rexall pharmacy owner The Katz Group, plans to open in four malls in Toronto and Ontario this fall.
Canopy's head of retail Lacey Norton acknowledged that the rate of store growth has been faster than the market may be able to handle but will likely sort itself out once pandemic-related restrictions end and Canadians continue to warm up to a legal cannabis market. Opening in malls is a "big win for the industry" as more major landlords like Cadillac Fairview accept pot stores within their real estate portfolio, but also stated that there is a cost-benefit to paying higher store rents to attract a certain shopper demographic, she said.
"It is a very unique real estate proposition for cannabis retail, but I think it will only continue to further support bringing cannabis to an audience of individuals and creating more access and positioning the product of a category in a completely different light," Norton said.
That mall strategy may be unique to Tokyo Smoke. Raj Grover, chief executive officer at High Tide inc., said in an interview that store rental rates in malls are often three times what can be found in other locations, and the company feels opening in major "big box" retailer locations that have major anchors like a Walmart or an LCBO is a better fit for a cannabis store.
"It's a night and day difference," he said. "It's also a particular type of clientele who are shopping in those malls. For us, it's not a great strategy to chase these rents and pay $120 or $240 a square foot and get stuck with leases for five to 10 years."
THIS WEEK'S TOP STORIES
B.C. to begin looking at cannabis consumption lounges
British Columbia is exploring the possible introduction of legal cannabis consumption lounges in the province, according to a note from B.C. union of municipalities on Wednesday. The statement said that B.C.'s cannabis regulator plans to meet with various stakeholders this fall and will open up for public consultation in 2022. Cannabis consumption lounges have struggled to get much attention amid Canada's now-legal cannabis framework with a handful of establishments in Ontario opening their doors to localized pot consumption despite a lack of clarity on provincial regulations. Ontario has been weighing a decision on whether to allow cannabis consumption lounges and create special-occasion permits but the province has yet to make a final ruling.
Fire and Flower bolsters digital strategy with PotGuide deal
Cannabis retailer Fire and Flower said it is buying online cannabis review site PotGuide for US$8.5 million in cash and stock, according to a release on Thursday. The deal follows the retailer's announcement earlier this month that it had signed to buy certain assets of Wikileaf Technologies in a move to push its Hifyre digital network into one of the world's most visited networks of cannabis websites and content platforms. ATB Capital Markets said in a note that PotGuide and Wikileaf are expected to bring over 200,000 subscribers to Hifyre’s Spark Perks membership program, which already has over 300,000 subscribers. The deal is expected to expand high-margin monetization opportunities for Fire and Flower, ATB added.
TGOD ships medical pot to South Africa, moves listing to CSE
The Green Organic Dutchman has officially moved to the Canadian Securities Exchange after de-listing from the Toronto Stock Exchange voluntarily, the company said Thursday. TGOD said the move will result in lower fees and allow the company to explore entering the U.S. cannabis market. The company said it is in early discussions with "approximately half a dozen groups" in the U.S., but didn't provide further specifics. Separately, TGOD also completed its first international commercial shipment to South Africa, according to a release on Wednesday.
Tilray CEO continues to seek investor support for share issuance strategy
Tilray's Chairman and CEO Irwin Simon published an open letter to the company's shareholders on Thursday, imploring them to vote in favour of issuing more stock to fuel future M&A deals. Simon said that Tilray has so far received 49 per cent shareholder support for its proposal, but needs 50.1 per cent support to go through with its plans. If approved, Tilray would be able to increase the authorized number of shares of common stock as well as enable several new governance enhancements to increase stockholder rights. Issuing new shares is a key plank of Tilray's M&A strategy to conduct further deals and explore more options in the U.S. cannabis market. As part of Tilray's deal to acquire a majority stake in outstanding MedMen Enterprises senior secured convertible notes, Tilray will sell nine million common shares to Gotham Green Partners.
Quarterly Results Wrap: Planet13, Indiva, TILT Holdings
Here's a summary of some of the cannabis industry companies that reported quarterly results this week:
- Gage Growth: Second quarter revenue up 130.2 per cent to US$26.4 million, US$1.9 million in an adjusted EBITDA loss, compared to a US$3.8 million loss a year earlier. (Release)
- Indiva: Second quarter revenue up 250 per cent to $9.1 million, $544,200 in adjusted EBITDA, compared to a $524,400 loss a year earlier. (Release)
- TILT Holdings: Second quarter revenue up 33 per cent to US$48.5 million, US$6.5 million in adjusted EBITDA, compared to a US$2.4 million gain a year earlier. (Release)
- Jushi Holdings: Second quarter revenue up 220 per cent to US$47.7 million, US$4.6 million in adjusted EBITDA, compared to a US$895,000 loss a year earlier. (Release)
- Planet13 Holdings: Second quarter revenue up 205 per cent to US$32.8 million, US$7.2 million in adjusted EBITDA, compared to a US$600,000 loss a year earlier. (Release)
- Slang Worldwide: Second quarter revenue up 147 per cent to $11.3 million, $946,000 in an adjusted EBITDA loss, compared to a $1.8 million loss a year earlier. (Release)
ANALYST NOTE - BMO Capital Markets, Cantor Fitzgerald on Hexo
Cantor Fitzgerald Analyst Pablo Zuanic lowered his 12-month target price on Hexo shares to $3.40 from $10 amid a broad "de-rating" within the sector, the company's increased share count and reduced visibility for Hexo's future earnings. Hexo issued 47 million new shares in a public placement that raised US$140 million, cash that was needed to help close its deal to acquire Redecan and was set aside to help fuel U.S. growth. Zuanic thinks that Hexo may trade at a higher level once investors better understand how Hexo - combined with Redecan, Zenabis and 48North - will operate once it goes through with its cost-efficiency plans. Meanwhile, BMO Capital Markets Analyst Tamy Chen maintained an "outperform" rating on Hexo's shares while trimming the target price to $7 from $11, viewing that the company's fundamentals and valuation remain the most compelling option amid its coverage of Canadian cannabis stocks. Chen notes that while Hexo's shares have fallen by about two-thirds since March, the company's retail sell-through remains strong in July and August and highlighted the company's partnership with an unnamed Fortune 200 CPG company. Chen indicated some caution ahead of Hexo's plans to launch its joint venture in California, one of the more competitive U.S. cannabis markets. "If Redecan's pre-rolls can gain meaningful traction in one of the most competitive U.S. states, it would be a positive for possible success for Hexo's overall U.S. strategy," Chen said.
CANNABIS SPOT PRICE: $5.28 per gram -- This week's price is up 1.1 per cent from the prior week, according to the Cannabis Benchmark’s Canada Cannabis Spot Index. This equates to US$1,886 per pound at current exchange rates.
WEEKLY BUZZ:
US$1.9 billion
- The size that South Africa's cannabis industry could grow to after the country's agriculture ministry completed a national strategy for the industrialization and commercialization of the plant.
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